What is an FHA loan?
The Federal Housing Administration offers over a dozen different insured mortgage programs. The most popular among these is the traditional, 30-year, fixed-rate mortgage.
FHA mortgages offer many benefits, in particular for first time home buyers. They include low to no down payments and lowered closing costs. Also, sellers may opt to help borrowers with these costs.
FHA Fixed 30-Year Loan | Quick Facts
- Low down payment – 3.5% minimum
- Low credit score ok – as low as 500
- Not limited to standard 43% debt-to-income ratio
- Loan is assumable
- Eligible for streamlined refinancing
- Shorter timeframe after major credit issues – 3 years vs. 7 years for foreclosure, and 2 years vs. 4 years for bankruptcy
- Lower interest rate compared to conventioinal loan
- Non-occupant co-borrower may be used to help qualify
Who should apply?
A 30-year fixed FHA loan is ideal for any borrower who wants to get into a home they might not otherwise qualify for. With a federally insured loan, on has options for low down payments and more forgiving credit and income requirements.
Low down payments
FHA-insured mortgages make homeownership a reality for many borrowers who would otherwise not be able to afford it. There are many reasons with home buyers use FHA mortgages over traditional mortgages, but the most popular are more relaxed credit and income requirements, and down payments as low as 3.5% of the sales price. Additionally, buyers can receive cash payments to cover down payments and closing costs. Sellers can also contribute a portion of sales proceeds to help cover closing costs for the buyer.
Steady payments distributed over decades
Most homes in this country are purchased using 30-year, fixed-rate mortgages, many of which are backed through the FHA or the Veterans administration. Banks, credit unions, savings and loan, and other financial institutions are happy to provide 30-year fixed loans, because they are the simplest and most stable type of home loan in the industry. Interest rates remain stable, which means monthly payments don’t change over the life of the loan. Because these loans are predictable, simple, and easy to understand, most buyers gravitate towards them.
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Qualify even with a low credit score
FHA-insured 30-year, fixed-rate mortgages are a boon to buyers with low credit scores. Typically, these loans only require a credit score of 620 or higher according to FICO guidelines. Moreover, these loans are more lenient towards borrowers with blemishes in their credit history. For example, borrowers with a bankruptcy in their history may still qualify, provided the bankruptcy is over two years old. In addition, FHA loans permit higher debt to income ratios. The primary purpose of these loans is to maximize rates of homeownership.
Not restricted to first-time homebuyers
Many people are under the false impression that FHA-insured mortgages are only for first time homebuyers, and that loan limits are prohibitively low. Neither of these is true. In places where cost of living is high, loan limits adjust accordingly. For example, the loan limit in Essex County, NJ stands at $726,525. The same goes for Hudson County and Hunterdon County. This is not including the down payment, which can add anywhere from 3.5% to 20% or more to the purchase price.
The costs of an FHA fixed 30-year mortgage
FHA fixed 30-year mortgages require the payment of a mortgage insurance premium, which usually lasts for the life of the loan. Upon closing, borrowers pay an up-front fee of 1.75%, though it can be rolled into the total amount of the loan. In addition, there is an annual fee of 1.05%, depending on the down payment and life of the loan. It gets divided into 12 monthly payments billed with the mortgage. The only way to avoid an insurance premium is by putting down more than 10%. In this case the premium comes off after only 11 years.
FHA Loan vs. Conventional Loan
|FHA Loan||Conventional Loan|
|Credit Score||Requires higher credit score||Credit score as low as 580|
|Down Payment||5% minimum||As low as 3.5%|
|Interest rate||Higher interest rate||Lower interest rate|
|Refinance||Requires credit check||No credit check, appraisal, or income verification required|
|Max Loan Amount||$424,100||Varies by county|
|Owner Occupied||Not required||Required|
|Down Payment Assistance||Not available||Available through SETH, TDHCA, TSAHC, and others|
|Mortgage Insurance||Not required if more than 20% down or below 78% loan-to-value-ratio||Available through SETH, TDHCA, TSAHC, and others|
|Down Payment as Gift||Only a portion||100% of down payment|